Business partner: helping reduce competition or just being dishonest?

On 21 July 2016 the Court of Justice of the European Union (CJEU) took another step forward in fighting business practices that restrict competition. This time queries about EU competition rules arose from activities undertaken by Latvian companies. The CJEU ruled on VM Remonts case No. C-542/14 after the Supreme Court of Latvia had asked for an interpretation of antitrust rules in a cartel case.

It is only recently that companies operating in Latvia have got the message (through being fined) that activities undertaken by a subsidiary may result in a fine being levied on its parent company. Management boards should therefore pay more attention to ensuring compliance with rules governing the activities of related companies. The management board now has an even wider range of responsibilities to ensure that shareholders interests are safeguarded.

Partnership

Business partners are the new category of risk for any company striving to comply with competition rules. Illogical as it may sound from an economic perspective, with business specialisation often achieving optimum results in terms of resource consumption, collaboration can lead to substantial fines if competition rules are neglected. In this case it does not even matter whether collaboration is with a competitor, supplier, or customer. Each particular case will have its own risks and liability levels.

The CJEU ruling is interesting in terms of a company’s relationships with external service providers, subcontractors and consultants, who might just as well be referred to as middlemen. Companies have so far been aware that direct contact with competitors about prices or plans is dangerous. But what would happen if such anti-competitive practices were undertaken by an independent service provider? Could the customer then be held responsible for the service provider’s actions? The CJEU finds that he could – and the Competition Council probably agrees.

Risks

The ruling on VM Remonts case offers three scenarios where a company can be fined for its part in a cartel after its business partner has acted against competition rules, but the company’s own actions are not blatantly unlawful. These are not exhaustive cases, yet they are practical.

The background to these examples is simple. Company X passes its trade secret (cost calculations) to a service provider and asks him to prepare a competitive bid. The bid prepared by the service provider suggests price-fixing with X’s competitors Y and Z.

Scenario 1

The service provider acts according to the instructions or under the direction of company X (his customer) under, say, an informal authorisation for particular activities that create the basis for a breach of law. The service provider’s limited autonomy results in him being considered a part of the company no matter how small the scope of his activity might be (a single task). In fact, this is similar to the same principle that applies to activities undertaken by a company’s employees. There is not much a company can do to distance itself not only from its own employees but also from any other company acting according to their instructions.

Scenario 2

Company X was aware of anti-competitive practices undertaken by the service provider and the company’s competitors Y and Z, including X’s awareness that its trade secret will be used in preparing the bids submitted by competitors Y and Z. This case is quite clear, and so the company should take steps to prevent the service provider from entering into anti-competitive practices with the company’s competitors.

Scenario 3

Company X was reasonably required to foresee that the service provider might pass its trade secret to competitors Y and Z, yet X was prepared to take this risk. It is this case that currently raises the most questions. The question of whether the company was reasonably able to foresee depends on a set of circumstances the company has little control over. What does the phrase “prepared to take” mean? What could be reasonably expected from the company? It would be disproportionate to prohibit the use of services only because of the possibility that the service provider will be dishonest.

Companies have several ways of ensuring that they comply with competition rules in the light of the latest CJEU findings. But there is no telling whether the Latvian regulator (Competition Council) will recognise those ways as sufficient. It is not difficult to prohibit everything that is not expressly permitted, but this approach might affect the competitiveness of the economy. Companies should not be kept in constant fear of fines without a clear public benefit from this environment, especially after the Commission has levied a new record fine of €2.9 billion on a group of truck makers for competition violations.

If you are not sure about your business partner's role or lawfulness, you are welcome to reach us at ZAB "PricewaterhouseCoopers Legal," Maris Butans, Senior Lawyer, Leader of the European Union and competition law practice group, t. +371 26578281 (maris.butans@lv.pwclegal.com).